The chair of a portfolio company board called me on a Tuesday afternoon last month. The controlling stockholder — a private equity sponsor that held 64% of the common — had begun “exploring” a take-private. The exploration had taken the form of two phone calls between the sponsor’s deal partner and the CEO, a back-channel about price between the sponsor’s CFO and the company’s CFO, and a Friday-afternoon Slack message in which the sponsor said it would “want to move quickly once the board got involved.” The board chair wanted to know when to charter a special committee. He thought the right answer was “after we have a number we can actually evaluate.”
I told him the right answer was yesterday. And that the answer being yesterday was the entire reason the call was awkward.
Delaware’s MFW framework — the procedural roadmap from Kahn v. M&F Worldwide that lets a controlling-stockholder transaction be reviewed under the business-judgment rule rather than entire fairness — depends on two protections, both of which have to be in place ab initio. The Latin phrase has been doing a lot of work in Delaware courts for over a decade, and last year’s amendments to § 144 of the DGCL did not make that work go away. They reshuffled the box, but the timing trap is still inside it.
What SB 21 actually changed
SB 21, enacted in 2025 and amending several provisions of the Delaware General Corporation Law including § 144, did three things that matter for controller deals. It codified a safe harbor for transactions involving controlling stockholders and conflicted directors, it specified which procedural protections qualify a transaction for the safe harbor, and it standardized the language Delaware courts had been developing around disinterested-director approval and informed stockholder ratification.
The codification was a clarification — not a liberalization. The statute now spells out what good practice already required: that disinterested directors (or an independent committee made up of disinterested directors) approve the transaction on a fully-informed basis, that the controller’s transaction be approved by a majority of disinterested stockholders also on a fully-informed basis, and that both protections be in place before substantive negotiations begin. The legislative history makes clear that the statute was meant to track MFW, not to displace it. The court-developed gloss on what “ab initio” requires survives the codification — and in some respects, the statute makes the timing requirement harder to evade.
Practitioners reading the SB 21 amendments as a relaxation of MFW are reading them wrong. The statute’s safe harbor is conditioned on the same procedural choreography that MFW already required, and the Court of Chancery has signaled — in the year and change since enactment — that it intends to police that choreography with at least the same rigor it applied before.
The timing trap is not a doctrinal nicety
Most controller-deal timing failures look the same. The controller and management have an informal conversation about a transaction. Numbers get exchanged. Sometimes a non-binding term sheet circulates. Somewhere in there, someone says we should probably get the board involved, and a committee gets chartered. The committee then runs the formal process — engages bankers, gets a fairness opinion, negotiates the merger agreement — and the parties think they have a clean MFW record.
They do not. The defect is the gap between the first substantive contact and the committee’s formation. The Court of Chancery has been clear, repeatedly and across multiple panels, that “ab initio” means before the controller has made price-defining moves. A pre-committee negotiation that anchors a price, sets a structure, or otherwise narrows the universe of outcomes the committee can credibly pursue is a defect that the committee cannot cure later, no matter how rigorous the post-charter process looks. Olenik v. Lodzinski (Del. 2019) made this point with unusual force, and the subsequent decisions in Flood v. Synutra (Del. 2018), Match Group (Del. 2024), and several Chancery opinions in 2025 have not retreated from it.
The post-SB 21 version of the timing trap looks like this. The statute’s safe harbor requires that the disinterested-director approval and the disinterested-stockholder ratification be made “on a fully-informed basis.” Fully-informed, in Delaware vernacular, includes informed about the negotiation history. A committee that comes into being after the controller has already established a price anchor is by definition not fully informed about the negotiation it inherited; it is being asked to ratify, not to negotiate. That gap is the kind of fact that survives the safe harbor’s pleading-stage protections and lands the case in entire-fairness review under § 144(a)(4) or its analog.
What this means for the drafting choice at the table
The practical answer is not complicated. It is just inconvenient.
First, the special committee has to be in place before any substantive negotiating contact between the controller and the company. “Substantive” is doing work in that sentence. A scheduling call is not substantive. A “we are thinking about going private” disclosure to the board is not substantive. A back-channel about price — even an indicative one, even a casual one between two CFOs over coffee — is substantive. Once that line is crossed, the committee that gets chartered next week has a real problem, and the problem will surface in the demand-letter phase of stockholder litigation that nearly always follows controller deals.
Second, the committee’s charter has to expressly authorize it to say no. A charter that says “evaluate and recommend” is weaker, on the ab initio analysis, than a charter that says “negotiate, evaluate, and decline if the committee determines the transaction is not in the company’s best interest.” The asymmetry matters because the Delaware courts read the charter as a fact about the committee’s authority — and a committee that cannot decline is not really negotiating, it is rubber-stamping.
Third, the committee should engage independent counsel and a separate financial advisor before any contact with the controller. The optics of this matter as much as the substance. A committee that does its first deliberative meeting with the same bankers who advised the company on its IPO three years ago — bankers who have a relationship with the controller’s portfolio team — is starting with a presumption against it. The disinterestedness analysis under § 144 is fact-intensive, and the courts have learned to look at relationships, not just titles.
Fourth, the disinterested-stockholder vote should be structured as a true majority-of-the-minority — not a “majority of votes cast by disinterested stockholders,” which is a weaker formulation. The fully-informed component requires a proxy statement that discloses the negotiation history honestly, including any pre-committee contacts. A clean disclosure is awkward when the pre-committee history is messy, which is why getting the committee in place ab initio is the lower-cost path even setting aside the litigation risk.
Where SB 21 helps — and where it does not
The new statute does provide one meaningful comfort. For transactions that satisfy the safe harbor’s procedural requirements, the standard of review under § 144 is now business judgment rather than entire fairness, and the burden of pleading around the safe harbor falls on the plaintiff. That is a real procedural benefit, and it changes the economics of post-closing stockholder litigation in ways that make settlements smaller and motions to dismiss more often granted.
What the statute does not do is cure a defective timing record. The safe harbor is not available if the procedural protections were not in place ab initio. A controller deal where the committee was chartered after substantive negotiation has begun is a deal that does not get the safe harbor, and it is therefore a deal that gets entire-fairness review with all the discovery and procedural overhead that entails. The asymmetry is precisely what makes the timing discipline at the front end so valuable. A meeting that costs an hour of director time to schedule properly avoids, in the bad case, a $40 million indemnification reserve and two years of stockholder litigation.
Boards that get this wrong are usually not getting it wrong because they do not know the rules. They are getting it wrong because the controller is in a hurry and the polite path is to let the conversation start informally. The polite path is the expensive path. The discipline of saying “we need to charter a committee before this conversation continues” is the cheaper one. Strong corporate governance practice — the kind that survives stockholder challenge — requires the discipline of inserting that procedural pause before any substantive contact, and not after.
One more thing about disclosure
If the timing record is messy and the deal is happening anyway, the disclosure obligation is doing more work than usual. A proxy statement that papers over the pre-committee contacts is worse than one that discloses them and explains the cure. Delaware courts have been remarkably patient with messy timing when the disclosure is candid — and remarkably impatient when the disclosure obscures. A board that finds itself in the timing trap should disclose the way out, not hope the trap is not noticed. It always is.
If you are a board considering a controller-led transaction, or a fund sponsor structuring a take-private of a portfolio company, the timing discipline at the front end is not optional. The M&A practice at the firm handles this kind of choreography routinely — feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
